Dollar Sits Near Peaks, Buoyed by Rate Outlook

The dollar traded tightly near a six-week peak against the euro and three-month high versus the yen on Monday as markets concluded that last Friday's weak U.S. housing data did little to shake receding expectations of a Federal Reserve interest rate cut.

The low yielding Japanese currency looked weak across the board as investors continued to favour selling low-yielders to fund purchases of higher return assets in carry trades.

European market activity was thin due to public holidays in Germany, Switzerland and Britain, while U.S. markets were also expected to be quiet due to the Memorial Day holiday.

Data on Friday showed that the pace of existing U.S. home sales in April was the weakest since June 2003.

Analysts concluded, however, that the figures would not be enough to dent broadly positive dollar sentiment as investors were still convinced that the Fed was in no hurry to cut rates
from their current 5.25%.

Other recent U.S. data has been supportive of that view. New U.S. home sales for April released early last week showed their sharpest climb in 14 years, signalling a stabilising housing market and lowering expectations of a rate cut.

"We've seen that the past couple of weeks have been more positive in terms of sentiment towards the dollar and even though we got poor figures from the housing market it didn't
change perceptions -- people didn't see that as having a big impact on monetary policy," said Johan Javeus, FX strategist at SEB.

The euro was up on the day at, but still within sight of a six-week low of $1.3410 hit on Friday. It was flat against the yen at 163.70.

The dollar was flat against the yen at, having hit a three-month peak of 121.88 on Friday and still within reach of a four-year high around 122.20 yen touched in

There was no reaction in Asian overnight trade to news that Japan's farm minister died following a suicide attempt, which followed media reports linking the minister to a number of
political fund scandals.

Carry Still Strong

Dealers said the enduring trend for carry trades was reflected in International Money Market data released late last week, with speculators boosting net short yen and Swiss franc positions.

Speculators also trimmed bets against the dollar, mostly at the expense of the euro and Australian dollar.

A climb in Asian stock prices on Monday was also seen weighing on the yen as they supported carry trade demand.

Asia-based analysts said it was only a matter of time before the dollar scaled fresh peaks above 122.20 yen, particularly if U.S. data this week, including May nonfarm payrolls, hardened views that a Fed rate cut may not be necessary this year.

"The yen will keep tapering down as long as share prices, particularly Chinese ones, face no serious corrections," said Mitsuru Sahara, a senior trader at the Bank of Tokyo-Mitsubishi

Looking ahead, the U.S. Treasury is expected to release its twice-annual report on currencies this week, which investors will scrutinise to see if it calls on China to allow the yuan to appreciate further after Beijing widened the currency's trading band earlier in the month.